How to Invest for Less

by Maria O'Brien

In a down market, especially when many investment portfolio values have been slashed by 30 or 40 percent over the course of a year, it’s become painfully apparent that a large part of those losses comes in the form of the fees you pay to invest your money. Over a period of several decades, from first investment to retirement, investment costs can eat up tens and even hundreds of thousands of dollars, destroying the real rate of return of a mutual fund.

For example, an initial investment of $50,000 over a period of 25 years at 8% would grow to $342,423. However, if the gains are 6% annually due to management costs and related fees, that number drops to $214,593 - a difference of $127,830. Even a difference of one percent can be huge over time - in 35 years, receiving 8% annual on $50,000 yields 739,267; compare this to the 533,829 from a 7% return on the same money.

For the average investor, most investment fees fall into one of three categories: mutual fund expenses, investment advisor fees and brokerage commissions, the per-transaction trading fees for buying and selling individual stocks. Mutual funds have some of the highest expenses, with exchange-traded funds (ETFs) usually somewhat lower.

But even ETF fees are not immune to change. According to Richard A. Ferri, CFA at Portfolio Solutions, LLC, “During the 1990s, new issue ETF fees averaged about 0.25%. Over the past few years new issue ETF fees were closer to 0.60% and this year the fee is closer to 0.80%. In addition, some of the more complex ETFs issued a few years ago capped their fees below the stated prospectus level. Those caps are starting to expire and fees are rising.”

Still, since they cost significantly less than mutual funds with high commissions (loads), low-cost index funds and ETFs are the better way for investors to get the same exposure to the financial markets without losing as much of their money in fees, said Ferri.

To maximize your savings and return on investment, Clint Gharib, Vice President of Investments at Turner Wealth Management, LLC, also recommends that you work with an independent, fee-based advisor. “Independent registered advisors provide access to a much wider range of investment products and services with no proprietary products to promote. An investment advisor must act in a fiduciary capacity on behalf of their clients, therefore providing a higher standard of disclosure than in a traditional securities brokerage environment. Because the financial representative gets a flat annual fee based on the amount of assets rather than a commission, transactions themselves do not benefit an advisor,” said Gharib.

Ferri agrees, saying, “Fire that high cost advisor. Advisors’ fees are the last bastion of gluttony in the investment business. They are simply too high. The advisors that charge 1% or more to manage a portfolio insist that they ‘add value’ though their investment selection. There is no academic evidence suggesting that paying high advisor fees provides any benefit over using a low cost advisor. In fact, high fees hurt your bottom line on a dollar for dollar basis.”

You can also save money by using discounted brokerage services instead of those with high per-transaction costs. Lowering these trading costs will help bring down your overall fees and improve your investment profits.

Jeff Nabers, CEO of Nabers Group and founder of the IRA Association of America, takes his investment theory a step further than simply trying to lower investment fees for Wall Street portfolios.

“The real cost of investing is poor investment performance due to lack of understanding and awareness that IRAs and 401ks do not have to be invested in Wall Street products,” said Naders. While investors think they are diversifying by buying a variety of stocks and funds, history shows that when the stock market goes down, all sectors of the market go down. The better option, he explains, is to get off Wall Street and thus actually diversify your investments.

Nabers, who is currently writing a book titled Unlimited Investing with a Self-Directed IRA LLC or Solo 401k: Break Free From Wall Street to Build Real Wealth with Alternative Investments, considers Wall Street somewhat of a casino when it comes to investments. In contrast, there are many other, better ways to invest money for retirement; for example, real estate, precious metals and small businesses.

Real estate prospectors of the past few years who bought based on the hope that their properties would increase in value and they could sell for a profit give real estate investing a bad name. The difference between them and successful real estate investors is in the verb, said Nabers. Profitable real estate investments are the product not of hoping, but of planning. Let’s say you want a minimum 10% annual return on investment (ROI) for your real estate purchase. You would look at properties, from apartment buildings to duplexes to single-family units, and make real calculations of what the properties will earn or cash-flow each year, based on area rents, factoring in taxes, mortgage payments, property management fees and the like.

After analyzing a number of properties, you would know which could provide the ROI you desire and plan your investment accordingly. That’s the difference - planning, not hoping. Stocks used to be the same way, where people bought them based on the dividends they produced and not simply for capital gains.

Investments that qualify for retirement plans are nearly limitless, said Nader, naming just life insurance, collectibles and self dealing as things that are not allowed. The sooner investors look outside the small box of Wall Street and actually diversify with sound, researched investments, the more they will avoid the high cost of investing found in fees and poor portfolio performance.

Looking for a fresh approach to investing? As an investor, be wise about your money. Avoid high-cost mutual funds and expensive investment advisors, choosing low-fee ETFs and fee-based services instead. On top of that, consider moving some or most of your money off of Wall Street and into carefully researched alternative investments.

Where Financial Gurus are Stashing Their Money

In times of market strife, financial gurus often tell investors to think long-term and stay the course. Some of them even put their own money where their mouth is.

A sampling of high-profile industry veterans, academics and brokerage-firm chiefs reveals that many are hanging on to holdings battered by last year's market slide and busily hunting down new opportunities, particularly among bonds and beaten-down value stocks. Some are snapping up municipal bonds, inflation-indexed securities and steady-Eddie dividend-paying stocks.

And they're generally upbeat about the prospects for long-term retirement savers.

"I think this is a marvelous time to be investing," says Rob Arnott, the 54-year-old chairman of Research Affiliates LLC, an investment-management firm in Newport Beach, Calif. "There are more interesting opportunities out there now than any of today's investors have ever seen."

Financial stars are facing some of the same retirement-planning headaches as ordinary investors. Many suffered substantial losses last year in a market that crushed nearly everything. But unlike many small investors, they're patiently waiting and watching for bargains rather than making a mad dash for havens like cash or Treasury bonds or drastically revising their asset-allocation plans. And where possible, they're even stepping up their savings to put more cash to work in the market.

Great investing minds don't always think alike, of course. John Bogle, the 79-year-old founder of mutual-fund giant Vanguard Group, says he has only about 25% of his portfolio in stocks, for example, while David Dreman, the 72-year-old chairman and chief investment officer of Dreman Value Management LLC, says he has a roughly 70% stock allocation.

They do appear to have one thing in common, though: patience -- a trait many small investors lack. Last year, 401(k) participants shifted around 5.7% of their balances, compared with just over 3% in a typical year, according to consulting firm Hewitt Associates. Money flowed out of stock funds and into bond investments, money-market funds and stable-value products. And many fed-up and tapped-out investors have stopped contributing to retirement accounts altogether.

But this is hardly the time to hunker down and take bets off the table, financial pros say. Don Phillips, managing director at investment research firm Morningstar Inc., says he invests his entire individual retirement account in the Clipper Fund, a large-cap stock fund that lost about 50% last year. Early this year, he made the maximum IRA contribution to that fund, just as he has for the last 20 years. "It's long-term money, and you have to look at it that way," he says.

Here's how some top investing experts are now allocating their own retirement savings and handling the heavy blows being dealt by a volatile market.

Bonds

While many financial gurus say they're starting to spot some great opportunities in stocks, they believe the bargains in select corners of the bond market are even better. "Certain parts of the bond market are priced for a scenario that's worse than the Great Depression," Mr. Arnott says.

One favored area is Treasury Inflation-Protected Securities, or TIPS, a type of Treasury bond whose principal is adjusted based on changes in the inflation rate. Ten-year Treasurys currently yield only about 0.9 percentage point more than 10-year TIPS, indicating that investors believe inflation will remain quite low in the coming years. Mr. Arnott says he boosted his TIPS allocation "in a very big way" in his personal taxable account toward the end of last year because he expects a substantial increase in inflation in the next three to five years.

Municipal bonds also look attractive to many longtime investors. Munis are typically exempt from federal and, in many cases, state and local income taxes. Many are now yielding substantially more than comparable Treasury bonds. In his taxable account, Mr. Bogle holds two muni-bond funds: Vanguard Limited-Term Tax-Exempt and Vanguard Intermediate-Term Tax-Exempt.

Burton Malkiel, a 76-year-old economics professor at Princeton University and author of "A Random Walk Down Wall Street," says he boosted his allocation to highly rated tax-exempt bonds in his taxable account late last year, since yields available on some of these bonds were "unheard of."

Some market watchers believe that it's time to take on more risk in their bond portfolios. Even investment-grade corporate bonds offer high yields, and below-investment-grade junk bonds yield far more than that. Mr. Arnott boosted his allocation to investment-grade corporate bonds in his personal taxable account late last year because the market had reached "irrationally high yields," he says. And Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School and senior adviser to exchange-traded-fund management firm WisdomTree Investments, has recently raised his allocation for junk bonds.

"Stocks and high-yield bonds will move together as the crisis passes," rebounding from their depressed levels, the 63-year-old Mr. Siegel says.

Stocks

Financial gurus are picking through the wreckage of last year's stock-market meltdown to find the best bargains.

Some are looking for companies with strong market positions and juicy dividends. Muriel Siebert, founder and chairwoman of brokerage firm Muriel Siebert & Co., has recently been buying shares of companies like General Electric Co. "I don't mind buying a stock on the bottom and waiting," says the 76-year-old Ms. Siebert. "But I do think when you get a market like this, you should be paid while you wait." Pfizer and Altria yield roughly 8%, while GE yields over 9%.

Some battered stocks in the energy sector also look like bargains, Mr. Dreman says. He likes oil and gas exploration and production companies like Anadarko Petroleum Corp., Apache Corp., and Devon Energy Corp. If we don't have a long world-wide recession -- a scenario that Mr. Dreman thinks oil prices currently reflect -- "we'll see much higher prices for oil again," he says.

Though foreign stocks were generally hit harder than U.S. shares last year, some gurus aren't rushing to invest overseas. Mr. Bogle, who says he has a very small allocation for international stocks, notes that investors poured money into foreign funds in recent years, chasing their strong returns, while yanking money out of lagging U.S. stock funds. "To me that's a red warning flag on a very tall flagpole on a very windy day," he says. "I also earn my money and spend my money in dollars, and I don't need to take currency risk."

Other experts say that emerging-markets stocks, which were hit especially hard last year, are starting to look tempting. If these shares take another dip, they could become "extremely interesting," Mr. Arnott says. Mr. Siegel keeps one-quarter to one-third of his foreign-stock allocation in emerging markets, and "they've gotten cheap enough to really give value now," he says. He has bought some more of these shares as they've declined in recent months.

Jim Rogers, a 66-year-old veteran commodities investor based in Singapore, is putting new money into Chinese shares. He's focusing on sectors of the economy that the Chinese are pushing to develop, such as agriculture, water, infrastructure and tourism.

Market gurus are also finding some bargains among alternative investments. Mr. Rogers is putting some new money into commodities, particularly agricultural commodities. "We're burning a lot of our food in fuel tanks right now," he says. And Mr. Siegel recently added some U.S. real estate investment trusts to his portfolio, which got "very cheap" after declining sharply last year, he says.

Staying the Course

Sticking to principles they've developed over decades in the market allows people who live and breathe investments to be relatively relaxed about their retirement portfolios.

Morningstar's Mr. Phillips, 46, has made it easier to stay the course. He has relinquished responsibility for allocating his 401(k) account, leaving those decisions in the hands of a managed-account program run by a unit of Morningstar. The program, which he started using in 2007, has "actually been very good for me," Mr. Phillips says. "They started putting me into things like TIPS and high-quality bond funds that I'd never had in the portfolio before."

And when they do suffer substantial losses, they tend not to panic. Mr. Phillips remains committed to his battered Clipper Fund, though it lagged the Standard & Poor's 500-stock index by about 13 percentage points last year. Ms. Siebert says she took a "very substantial loss" in Wachovia Corp. stock, which plummeted last year before the company was sold to Wells Fargo & Co., but she's hanging on to the Wells Fargo stock she received "until I see a reason not to."

She is, however, a bit sensitive when asked about her portfolio's overall performance last year. "Do you want to see a grown woman cry?" she asks.